Manhattan Apartment Buying May Not Be Great Deal

For Manhattan residents, the rent may not be too damned high, at least compared to the cost of buying an apartment.

A study released Friday by the Federal Reserve Bank of New York says apartment prices have grown considerably faster than rents have increased in recent years in Manhattan. The divergence raises serious questions about the outlook for housing prices in the borough.

Bloomberg News

“Manhattan price-rent ratios, although off their 2008 highs, are still up dramatically over the past two decades, suggesting less financial ‘value’ today in an apartment purchase there,” writes New York Fed economist Jason Bram, in the latest edition of the bank’s Current Issues in Economics and Finance.

The economist said apartment sales are in part driven by “speculative factors” that cause the market to move in different ways that the rental sector, which is driven to a greater degree by classic supply and demand dynamics.

That said, the substantial increase in buying costs relative to rentals raises questions about “the sustainability of current prices,” Bram wrote. He observed that although they are below their 2008 levels, “price-rent ratios in the borough are more than twice as high as they were in the mid-1990s,” he wrote.

For current Manhattan prices to make sense relative to rental costs, mortgage rates and property taxes, prices would need to appreciate by at least 4% a year, Bram said. If other costs are added in, the rate of price appreciation may need to be even higher.

The paper’s findings are based on a comparison of rental and ownership prices for Manhattan one-bedroom apartments between 1989 and 2011. Bram noted some recent information suggests that over this year, Manhattan apartment prices have stabilized, while rent-price gains have accelerated.

The New York Fed analyst wrote that a study of Manhattan’s real estate market is aided by its relative homogeneity. Whereas in many other cities there are big differences in what people rent and what they purchase, Manhattan has “a large luxury rental market and renters and owners often live side by side.” This unique environment somewhat simplifies the question of true cost of renting versus buying, the analyst said.

Manhattan’s real estate market is further distinguished by the fact it largely sidestepped the ongoing crisis in home prices that continues to play out in the rest of the nation. The borough’s space constraints and business environment helped it largely sidestep the house price bubble implosion that generated the worst recession since the Great Depression.

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